Question 1

If workers demand wage compensation in advance of inflation, the economy's aggregate supply curve will

Accepted Answer

If workers demand wage compensation in advance of inflation, it means they want to maintain the purchasing power of their wages. This will cause the costs of production to increase, leading to a shift in the aggregate supply curve upward and to the left, resulting in a vertical aggregate supply curve.

Question 2

If the self-correcting mechanism operates quickly,

Accepted Answer

If the self-correcting mechanism operates quickly, it means that the economy will naturally return to its long-run equilibrium without much intervention needed from the government. Therefore, direct intervention from fiscal or monetary policy may be less necessary to close a recessionary gap.

Question 3

If actual inflation differs from expected inflation, what is the slope of the aggregate supply curve?

Accepted Answer

The slope of the aggregate supply curve is upward sloping in the short run because producers can increase output in response to higher prices. However, in the long run, the economy reaches full employment, and the aggregate supply curve becomes vertical. If actual inflation differs from expected inflation, it will create a mismatch between the prices firms expected to receive and the prices they actually receive, leading to a change in the level of output. This will cause the short-run aggregate supply curve to shift, but it will not affect the long-run aggregate supply curve. Therefore, the slope of the aggregate supply curve remains upward sloping in the short run but becomes vertical in the long run.

Question 4

If workers expect inflation, and negotiate wage increases that exactly match price increases, the result is a

Accepted Answer

If workers negotiate wage increases that exactly match price increases, the cost of production for firms will increase, but the output level and potential GDP will stay the same. As a result, the aggregate supply curve will become vertical at the level of potential GDP, indicating that any increase in demand will only lead to an increase in prices, not an increase in output.

Question 5

If workers always see inflation coming, and if they demand wage increases in advance so that inflation does not erode real wages, then the economy's aggregate supply curve on the AD-AS diagram will

Accepted Answer

If workers always see inflation coming and demand wage increases in advance, the economy's aggregate supply curve will be vertical at the level of potential GDP. This is because any increase in demand for goods and services will simply lead to higher prices rather than increased production, as workers are already being paid higher wages to compensate for the expected inflation. Therefore, the economy will always operate at its potential output level, regardless of changes in demand.

Question 6

Policymakers who believe that the costs of inflation are very high will tend to favor which of the following during an inflationary gap?

Accepted Answer

Policymakers who believe that the costs of inflation are very high will tend to favor fiscal and monetary tightness during an inflationary gap. This means that they will reduce government spending and increase taxes on one hand, while increasing interest rates and reducing the money supply on the other hand in order to reduce aggregate demand and cool down the economy. This policy mix is aimed at reducing inflationary pressures and restoring price stability, which is seen as a crucial goal of monetary and fiscal policy.

Question 7

Many economists think that, in the long run, the economy tends to move toward

Accepted Answer

The natural or full-employment rate of unemployment is the rate at which there is no cyclical or demand-deficient unemployment in the economy. It is the unemployment rate at which the economy is operating at its potential output, and there is no upward or downward pressure on inflation. Thus, in the long run, the economy tends to move toward this rate of unemployment.

Question 8

Many economists think that, in the long run, the Phillips curve is

Accepted Answer

Many economists believe that in the long run, the Phillips curve is a vertical line because they believe that changes in the rate of inflation have no impact on the rate of unemployment in the long run. This is known as the natural rate of unemployment and suggests that any attempt to reduce unemployment below this natural rate through inflationary policies will ultimately be unsuccessful. Therefore, in the long run, the Phillips curve is not a useful tool for policymakers to use for addressing unemployment and inflation simultaneously.

Question 9

If employees and employers always accurately predict inflation, what is the shape of the Phillips curve?

Accepted Answer

If employees and employers always accurately predict inflation, then the Phillips curve would be vertical in both the short and long run because there would be no relationship between unemployment and inflation. This is because both employers and employees would incorporate their expectations of future inflation into wages and prices, resulting in a constant rate of inflation regardless of the level of unemployment.

Question 10

If workers underestimate inflation, the aggregate supply curve will tend to be

Accepted Answer

If workers underestimate inflation, they will expect lower prices for their goods and services. As a result, they will supply more to the market than what is demanded, leading to an excess supply. To sell their excess supply, workers will lower their prices, and the overall price level will decrease. This will shift the short-run aggregate supply curve to the right, causing it to be upward sloping.

Question 11

If the short-run Phillips curve has a very flat slope, the

Accepted Answer

A flat short-run Phillips curve indicates that there is little trade-off between inflation and unemployment. In other words, reducing unemployment does not lead to a significant increase in inflation. Therefore, the costs of reducing unemployment, in terms of higher inflation, are relatively low.

Question 12

If workers expect inflation, and tend to overestimate actual inflation when they negotiate wage increases, the result will be a continuing

Accepted Answer

The answer of If workers expect inflation, and tend to...

Question 13

If inflationary expectations are quite sluggish (that is, they do not adapt quickly), then the short-run Phillips curve will

Accepted Answer

The answer of If inflationary expectations are quite sluggish (that...

Question 14

Rational expectations are forecasts

Accepted Answer

Rational expectations are based on the available data and information, but they are not necessarily perfectly accurate. Instead, they are the best forecasts that can be made given the available information at the time. Rational expectations assume that individuals base their expectations on all available information, including their past experiences and future expectations. Therefore, these forecasts are inherently subjective and can differ from person to person. Rational expectations play an important role in economic decision-making and policy formulation.

Question 15

A vocal minority of economists, believers in the theory of rational expectations, insist that

Accepted Answer

Economists who believe in rational expectations argue that the Phillips curve is vertical even in the short run because individuals and firms adjust their expectations about inflation based on current and anticipated economic conditions, thereby eliminating any trade-off between inflation and unemployment.

Question 16

Based on the evidence, most economists believe that the self-correcting mechanism operates

Accepted Answer

The answer of Based on the evidence, most economists believe...

Question 17

If actual inflation differs from expected inflation, what is the slope of the Phillips curve?

Accepted Answer

The answer of If actual inflation differs from expected inflation,...

Question 18

If workers and firms forecast inflation accurately,

Accepted Answer

When workers and firms accurately forecast inflation, they adjust their expectations and actions accordingly. This means that the real wage remains stable as nominal wages adjust to the inflation rate, ensuring that workers do not lose purchasing power and firms do not gain extra profit margins from the inflation. Consequently, the aggregate supply curve reflects an economy in long-term equilibrium, where it is vertical, indicating that output is at its natural rate and is not influenced by the price level.

Question 19

What will tend to happen to wages if workers and employers foresee inflation?

Accepted Answer

If workers and employers foresee inflation, both parties will want to maintain the real value of wages. In order to do so, nominal wages will have to increase by the same rate as inflation, ensuring that real wages remain constant. This is known as indexed or inflation-adjusted wages. Therefore, nominal wages will increase by an amount that keeps real wages constant.

Question 20

If the short-run Phillips curve has a very steep slope, the

Accepted Answer

A steep slope of the short-run Phillips curve implies that there is a strong trade-off between inflation and unemployment. Therefore, any attempt to reduce unemployment through expansionary policies would result in a significant increase in inflation. Thus, the inflation costs of reducing unemployment are relatively high.

Quiz 33: The Trade-Off Between Inflation and Unemployment